Tuesday, October 2, 2012

The "Cost Disease" of Health Care: William Baumol's Surprising Perspectives on Why It's Unavoidable and Not That Bad

1. While health care costs have gone up, patients are benefiting from relatively greater parallel increases in value. For example, compared to just a few years ago, cancer and heart attack survival rates are much better.

2. As societies grow more affluent, they are more willing to pay more for that higher value health care. While the U.S. is an outlier in absolute per capita costs, all developed countries have the same rate of year over year cost increases. In fact, some countries are higher health care inflation rates than the U.S.

3. The ability of government to referee the cost, value and affordability dimensions of health care is doubtful.

According Professor Baumol, a nation's health care costs should be contrasted with the rest of its economy. Using that perspective, two national economic sectors are:

1) progressive, which uses innovations to reduce labor costs and

2) stagnant, which relies on personal services and will always have fixed labor costs.

Examples of progressive goods are automobiles and computers. In inflation-adjusted terms, their costs have dropped precipitously. That's because fewer workers are needed per car (translating into lower labor costs), technology has made them more efficient, safe and fun. Not only do we feel wealthy, the drop in progressive costs of transportation, housing and food means we really are more wealthy.

Examples of stagnant goods are education and health care. In inflation-adjusted terms, their costs have remained stubbornly elevated. There have been some attempts at "do it yourself" learning or treatment. There have been stunning advances in the science health care. Distance learning is a growing option. Yet, teaching and doctoring remain remain highly personalized, Human resource costs rule when it comes to individualized care.

In simple mathematical terms, the falling costs of the progressive goods and services translates into a shrinking fraction of an economy. While the absolute number of computers and cars is increasing, their absolute dollar value - which is the metric used to measure a nation's gross domestic product (GDP) - is lower. As a result, the denominator is smaller, making the percent of GDP going to health care (the numerator) relatively larger. Health care costs aren't really going up, the cost of everything else is going down.
But wait, it gets worse. As labor gets squeezed out of the progressive economic sector, two things are happening:

a) the value of progressive manual labor is dropping, leading to falling wages for millions of unlucky Americans who are not "knowledge" workers (like engineers and technologists);

b) because less of everyone's income will be spent on stuff like cars and computers, they'll see a greater percent of their income going toward - you guessed it - health care and education. That means the unlucky manual workers unable to find jobs in progressive manufacturing will find that education and health care are unaffordable.

Enter government. Whether we planned it or not, government has traditionally supported stagnant services. This not only includes health care and education, but others that are fundamentally personal, like policing, sanitation and the military. As a result, even if the U.S. government doesn't change a thing, it's inevitable that health care will occupy a greater portion of a nation's GDP. And since displaced workers from the progressive sector can't afford it, it makes sense for government to expand what it's been doing all along.

Bottom line? "Rising" health care costs are a function of its highly personal nature surrounded by an increasingly efficient economy that enables us and our government to pay for it. Dr. Baumol calls this phenomenon "cost disease."

Dr. Baumol makes two other points:

1) The fundamental danger to society is not the rising costs of education and health care. It's the falling progressive price of weapons (from AK-47s to nuclear bombs) and the pollution from expanded manufacturing (from oil spills to global warming).

2) Many decade's worth of past attempts to blunt health care costs as GDP rises have failed and will continue to do so.

Here's the User Interface

The PHB & Twitter

LinkedIn

Some more....

Proud to be....

PHB Peer Reviewed Publications:

PHB on Twitter!

Why Should I Read the PHB?

Here's what one reader had to say about the Population Health Blog's ability to to go beyond simple headlines and mainstream newsfeeds:

"This past week, I was surprised to read some of the generic headlines summarizing the VA readmission study. You know, through medical newsfeeds, they almost implied that length of stay didn't have anything to do w/readmissions. When I read the Annals article today, there was certainly a lot more to the study than that. Was happy to see your nice summary, which I agree w/100%. Just wanted to drop you a line to say that Ilooked at your blog w/hopes of finding some commentary on the study---and there it was!"

Not Exactly A Waste Of Time.....

Subscribe To The PHB

This is still true, by the way.....

“Moving into the next century, the most important breakthroughs will be in the from of clinical process innovation rather than clinical product improvement…the next big advances in health care will be the development of protocols for delivering patient care across health care settings over time.”

JD Kleinke, Bleeding Edge

++++++++++++++++++++++++++

Vox audita perit, litteras scripta manet

++++++++++++++++++++++++++

Do Aetna, Humana or UnitedHealth Insurance Cover It? Find Out Here

About Jaan Sidorov MD, MHSA, FACP

While his web persona has been described as a "blogvocateur," Dr. Sidorov has wide range of knowledge about the medical home, condition management, population-based health care and managed care that is only exceeded by his modesty. He has been quoted by the Wall Street Journal, Consumer Reports and NPR’s All Things Considered.
He has over 20 years experience in primary care, disease management and population based care coordination. He is a primary care general internist and former Medical Director at Geisinger Health Plan.
He is primary care by training, managed care by experience and population-based care strategies by disposition.
The contents of this blog reflect only the opinions of Sidorov and should not be interpreted to have anything to do with any current or past employers, clients, customers, friends, acquaintances or enemies, personal, professional, foreign or domestic. This is also not intended to function as medical advice. If you really need that, work with a personal physician or call 911 for crying out loud.
Jaan can be reached at jaansATaolDOTcom.